Investor Alert

March 29, 2018, 2:12 a.m. EDT

CME offers to buy NEX in $5.4 billion deal

By Alexander Osipovich

CME Group Inc. has offered to buy U.K. financial-technology company NEX Group PLC, a deal that would put the Chicago futures-exchange giant in a commanding position in the vast market for U.S. government debt.

NEX said in a statement on Wednesday that it had received a nonbinding takeover offer of GBP10 a share, the equivalent of $14.08. That would value the London-based company at about $5.4 billion.

NEX said discussions were at an "advanced stage." There is no certainty as to whether an offer will be made, or what the terms of an offer would be, NEX said.

Representatives of CME and NEX declined to comment.

The two companies confirmed earlier this month that CME had made a preliminary takeover approach to NEX. The news set off speculation that other bidders could emerge for NEX, such as Intercontinental Exchange Inc., owner of the New York Stock Exchange, or London Stock Exchange Group PLC. It also triggered a surge in NEX's stock price, which is up 45% since reports of the talks emerged on March 15.

NEX owns the biggest electronic platform for U.S. Treasury bonds trading, called BrokerTec, while CME dominates the market for interest-rate futures linked to U.S. government bond prices. Combining the two would put CME in a powerful position, as it would control the plumbing that underpins both Treasury futures and a swath of the underlying "cash" market.

"We believe combining the underlying cash securities with the trading of the listed futures would be a first in the exchange industry and ... would set a unique precedent," Rich Repetto, an analyst at Sandler O'Neill + Partners, said in March 19 research note about the deal.

That could bring greater efficiencies to bond trading. Currently, Wall Street firms active in both cash Treasurys and interest-rate futures need to post cash to back their trades in two separate places. Bringing BrokerTec and CME's futures under the same roof could lead to one unified clearing system for both kinds of trades, freeing up cash that traders could use for other purposes.

U.S. government bonds are the world's biggest debt market, with some $14.5 trillion in Treasury securities outstanding. About $535 billion of Treasurys traded each day on average for the week ended March 14, according to Federal Reserve data.

According to the rules of the London Stock Exchange, CME has until April 12 to either make a firm offer or announce that it doesn't intend to bid for NEX.

If completed, such a deal would likely be the biggest acquisition for CME since 2008, when it acquired the New York Mercantile Exchange for about $10 billion. That deal helped cement CME's status as the world's largest exchange operator, with markets running the gamut from wheat to gold to crude oil futures.

The firm, whose roots date back to the mid-19th century, has been periodically criticized for exerting its dominance over the markets to increase fees and stifle competition.

Besides BrokerTec, NEX runs major electronic markets for foreign-exchange trading and owns technology used to process derivatives trades. Led by Chief Executive Michael Spencer, it formerly was known as ICAP PLC.

For years, ICAP was the largest player in interdealer brokerage, the business of brokering deals in complex derivatives products between banks, often over the phone. But in 2016, ICAP sold its brokerage business to rival Tullett Prebon to focus on electronic trading and financial technology and rebranded itself as NEX.

Mr. Spencer, who founded the forerunner of ICAP in 1986, became one of Britain's richest men with the expansion of the derivatives markets. A well-known entrepreneur in the City of London, he was the former treasurer of Britain's Conservative Party.

--Daniel Kruger contributed to this article.

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